Five considerations for start-ups that are looking for funding

Apr 10, 2018

Many entrepreneurs in South Africa consider funding to be a major stumbling block when it comes to starting or growing a business. In this tough environment where a majority of start-ups fail within the first 5 years of operations, the type of funding that a startup secures to either launch or grow a business often determines success.

Mags Ponnan, Head of the Business Incubator at FNB Business believes that entrepreneurs should rather focus on lean business models that do not require much funding injections at regular intervals.

“A business has one core goal and that is to prove that the business concept or the big idea can and will work once rolled out and operational. Often, businesses at launch phase complicate the core offering to a point where they require far more funding than they are capable of accessing. What you end up with is a good business succumbing to a poorly managed approach to launching or scaling,” explains Ponnan.

Ponnan shares insights on considerations that entrepreneurs should ponder when seeking funding:

Ensure that current business model is as lean as possible – Having a low cost model ensures that the business has a better chance of having a higher profit margin and more cash flow to put back into the business’ daily activities. This not only builds confidence in a possible funder’s mind, it reassures one that the entrepreneur has potential to achieve his or her business strategy.

Be certain that the business really needs capital injection – This is a crucial step for entrepreneurs as funding should not be the first consideration but an option. Importantly, some entrepreneurs forget that an investor or lender will need a strong plan of action which will highlight where the funds will be directed and managed, and if the entrepreneur can successfully implement the plan.

Tracking the results and impact of the funds being injected in the business is crucial– If the entrepreneur has efficiently managed the little funds that they have been running the business with, it could mean that funds provided may lead to achieving the more “bang for buck”, and a bank or investor may be more prone to invest more funds in the business.

Always phase your projects over a period of time – Many entrepreneurs make the mistake of asking for the total sum up front, this increases the risk exposure of the investor or lender. But it is easier to ask for smaller amount which will be enough to kick off the 1st phase and once you have demonstrated the results and shown traction, you can go back for more funds for the next phases to be implemented.

Always try to raise the funds by yourself – Entrepreneurs should also consider using personal savings, earnings, or borrowing from friends and family members. This might take longer and be harder for the entrepreneur but that extra effort will be rewarded as there’s no interest on the repayment and there may be flexibility around the timing of the repayment.

“The thing to always remember is that access to funding comes at a cost. Entrepreneurs need to understand that borrowing money that will need to be paid back at an interest should always be the last resort. Should the business be in a space where it requires funding, then it should be calculated and measured during implementation and there should be a plan on how it will be repaid,” concludes Ponnan.